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Ex-CEO Scrushy facing 85 counts

Former HealthSouth chief executive Richard Scrushy was charged with 85 federal counts Tuesday in an alleged $2.7-billion fraud that prosecutors say financed his lavish life of big boats, fancy cars, mansions and jewels.

The charges against Scrushy include false certification of corporate statements, a new offense that makes him the first chief executive accused under the Sarbanes-Oxley law passed last year to target corporate wrongdoers.

Scrushy, 51, who rose from humble Alabama roots to build one of the country's largest health care conglomerates, pleaded innocent and was released on $10-million bail secured by his three homes and 360 acres of former plantation property.

Scrushy faces a maximum penalty of 650 years in prison and $36-million in fines. Trial was set for Jan. 5.

The indictment, returned last Wednesday and released Tuesday, had been sealed amid government claims that his bodyguards had weapons and spy equipment that intimidated witnesses.

It seeks the return of more than $278-million in allegedly ill-gotten gains, including a 92-foot yacht, a 40-foot racing boat, beach and lake homes, diamond jewelry, antique rugs and a 2003 Lamborghini.

The government also is after Scrushy's two airplanes, a Rolls-Royce Corniche, a nearly 22-carat diamond and platinum ring, and paintings by Picasso, Chagall, Renoir and Miro.

Once best known as a self-made millionaire and philanthropist whose name adorns buildings across Alabama, Scrushy uttered only one word in court when a judge asked if he wanted to plead innocent.

"Yes," Scrushy said.

His wife and a pastor sat on a courtroom bench nearby. Former five-term Birmingham Mayor Richard Arrington also came in a show of support.

On his Web site Tuesday, Scrushy posted a statement that read in part: "I am an innocent man. I am deeply disappointed to have my innocence questioned and contested; however, I now embrace the opportunity to clear my name."

HealthSouth, which has revamped its board and executive ranks, said Tuesday that it is cooperating with investigations into "the fraud perpetrated against the company."

U.S. Magistrate Judge T. Michael Putnam ordered Scrushy to keep in regular touch by phone with federal authorities and, despite defense objections, surrender his passport and keys to his airplane, restrict travel to northern Alabama and wear an electronic ankle bracelet.

"We're not running from these charges," said defense lawyer Richard Deane.

The government contends Scrushy and other executives inflated earnings by $2.7-billion from 1996 through March to make it appear HealthSouth was meeting expectations of Wall Street analysts.

Scrushy, a Selma native and former respiratory therapist who helped build the firm into an industry leader, has blamed the fraud on others within the company.

Fifteen former HealthSouth executives, including all five of the company's past chief financial officers, have reached plea deals and are cooperating with prosecutors.

Scrushy attorney Tom Sjoblom did not rule out a possible plea agreement for his client. "We are leaving all doors open," he said.

While the Scrushy case has renewed attention on corporate fraud, many of the names synonymous with the scandals that have rocked corporate America in recent months either are not facing any charges or have been accused of crimes other than accounting fraud.

Former Enron Corp. chief executives Kenneth Lay and Jeffrey Skilling, for example, have not been charged with any crimes, and former Tyco International CEO Dennis Kozlowski is on trial for larceny, accused of enriching himself from company coffers.

One of the highest-ranking executives to go to prison, former ImClone Systems chief executive Samuel Waksal, was sentenced on charges relating to insider trading.

Former WorldCom Inc. chief Bernhard Ebbers and others face state charges in Oklahoma, accused of fraud for providing false financial information, but several experts said Scrushy's case may be more significant.

The case against Scrushy has been viewed as an important test for the Sarbanes-Oxley Act, passed in reaction to the wave of corporate accounting scandals. The law requires chief executive and chief financial officers to certify company financial statements and holds them criminally liable for inaccuracies.

"I view this as a defining moment" for that aspect of Sarbanes-Oxley, said Anthony Pacheco, a former assistant U.S. attorney who is a white-collar defense attorney at the Proskauer Rose law firm in Los Angeles.

Because that provision of the law requires CEOs to certify that they are responsible for internal controls, Pacheco and other legal experts said it would complicate any defense by Scrushy that he didn't know what was going on.

The indictment says Scrushy and his accomplices reported fictitious earnings through an elaborate system of bogus accounting entries.

In a civil lawsuit, the SEC has accused Scrushy of insider trading and inflating company earnings by $1.4-billion and assets by $800-million.

The SEC sued HealthSouth and Scrushy on March 19, after a former chief financial officer, Weston Smith, became the first HealthSouth executive to plead guilty. Smith confessed to falsely certifying financial results under the Sarbanes-Oxley Act.

HealthSouth fired Scrushy after the SEC filed its lawsuit.

Because Scrushy's compensation was tied in part to HealthSouth's performance, the scheme allowed him to pocket $267-million in salary, bonuses and stock options, Assistant Attorney General Christopher Wray said at a Washington news conference.

Scrushy enforced discipline among participants in the conspiracy "through threats, intimidation and payoffs," Wray said, and also eavesdropped on employees' telephone calls and e-mail.

In asking a judge to seal the indictment after it was returned, the government said witnesses against Scrushy were afraid and "concerned for their personal safety."

Members of HealthSouth's security department had assault rifles and other equipment, the government argued, and one person loyal to Scrushy took those weapons, shotguns and other firearms with him when he left the company.

Defense attorneys denied that Scrushy had tried to intimidate anyone.

Officials with HealthSouth, which has avoided bankruptcy despite the financial pressures of the fraud scandal, issued a statement saying its new management team and board have been actively cooperating with the criminal, civil and congressional investigations.

"While the government authorities are doing their job with regard to this case, we at HealthSouth will continue to concentrate on what we do best _ treating patients under our care and continuing to stabilize the company," the statement said.

Founded by Scrushy in 1984, HealthSouth is the largest U.S. provider of outpatient surgery, diagnostic imaging and rehabilitation services. It has some 50,000 employees and about 1,700 sites in all 50 states and overseas.

_ Information from the Associated Press, Chicago Tribune, Bloomberg News and New York Times was used in this report.

THE YACHT

Federal prosecutors want to seize Richard Scrushy's yacht, Chez Soiree, along with at least three other boats owned by the former HealthSouth chief executive.

THE MANSION

Prosecutors say Richard Scrushy has homes valued in the millions of dollars in Birmingham and Ono Island, Ala.; Palm Beach, and this one in Alexander City, Ala.

THE GIRLS MUSIC GROUP

HealthSouth's board awarded stock options to former Sony Music chief Tommy Mottola before Sony signed the trio 3rd Faze _ Minia Coraminas, left, Sara Marie Rauch and Halie Clark _ managed by Scrushy, to a recording contract.

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